better with those of its peers in a competitive lending environment.
State Bank of Indias base rate is 10% as is that of ICICI Bank and HDFC Bank. Most banks are sitting on abundant liquidity, at a time when demand for corporate loans is sluggish and non-food credit growth is hovering around 10-11%. The base rate is the minimum lending rate below which a bank can't lend.
According to Jairam Sridharan, president (consumer banking) at Axis Bank, the lender had been considering a rate cut for quite some
time and it would help the interest-sensitive home-loan portfolio.
The incremental certificate of deposit (CD) and fixed deposit (FD) rates have been falling and costlier deposits are being replaced by cheaper money. Moreover, given that there is low credit offtake, we thought we could pass on some of the benefit to customers, Sridharan said.
Public sector banks like Punjab National Bank (PNB), Bank of Baroda and IDBI Bank have a higher base rate of 10.25%.
An analyst at a foreign brokerage said that since close to 85% of a banks loans have been based on a floating rate, a 10-bps cut in base rate would lower its net interest margin (NIM) by 7-8 bps.
This cut is well-timed to attract customers in the festive season and grab a larger pie of the market, said Ananda Bhoumik, senior director, India Ratings and Research.
Other banks, Bhoumik said, might not necessarily go for a rate cut as it immediately affects the net interest margin of the lender and, therefore, they would be cautious and ensure lower cost of funds before any rate cuts.
In the June quarter, though Axis Bank's retail loan portfolio saw a healthy increase of 29% compared to the same period last year, the growth in corporate advances was laggard at 2% y-o-y. As on June this year, its domestic retail advances, which are dominated by housing loans, constituted 45% of its net advances.
Owing to low credit demand, banks have already been lending at their base rate, even to AA-rated customers. Credit growth, which was at decadal low of 9.8% for the fortnight ended September 5, has slightly improved to 11.15% in the October 3 fortnight. That apart, ample liquidity and a lack of lending opportunities prompted SBI to trim deposit rates for its retail customers and PNB to lower rates for bulk deposits.
In 2013, public sector lenders like Central Bank of India, Bank of India and Canara Bank had cut base rates.